FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-26109
NETTAXI.COM
(Exact name of registrant as specified in its charter)
Nevada 82-0486102
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1696 Dell Avenue, Campbell, CA 95008
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 879-9880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Applicable Only To Corporate Issuers:
As of August 1, 2000, the registrant had 42,619,586 shares of common
stock, $.001 par value per share, outstanding.
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NETTAXI.COM
CONTENTS
PART I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2000 (unaudited) and June 30, 1999 (unaudited) 4
Condensed Consolidated Statements of Shareholders' (Deficiency) Equity,
June 30, 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 (unaudited) and June 30, 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 34
EXHIBIT INDEX 35
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETTAXI.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 JUNE 30, 2000
------------------- ---------------
(UNAUDITED)
---------------
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ASSETS
-----------------------------------------------------------------------------------
CURRENT ASSETS:
-----------------------------------------------------------------------------------
Cash and cash equivalents $ 987,700 $ 16,734,200
----------------------------------------------------------------------------------- ------------------- ---------------
Accounts receivable, net of allowance for doubtful accounts of $83,600 and
$260,600, respectively 1,181,600 1,810,300
----------------------------------------------------------------------------------- ------------------- ---------------
Prepaid expenses and other assets 609,200 920,300
----------------------------------------------------------------------------------- ------------------- ---------------
TOTAL CURRENT ASSETS 2,778,500 19,464,800
----------------------------------------------------------------------------------- ------------------- ---------------
Property and equipment, net 1,968,600 1,888,800
----------------------------------------------------------------------------------- ------------------- ---------------
Intangibles, net 578,000 476,000
----------------------------------------------------------------------------------- ------------------- ---------------
Deferred expenses 706,100 630,800
----------------------------------------------------------------------------------- ------------------- ---------------
TOTAL ASSETS $ 6,031,200 $ 22,460,400
----------------------------------------------------------------------------------- ------------------- ---------------
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
-----------------------------------------------------------------------------------
CURRENT LIABILITIES
-----------------------------------------------------------------------------------
Accounts payable $ 4,041,400 $ 1,201,000
----------------------------------------------------------------------------------- ------------------- ---------------
Accrued expenses 664,500 774,700
----------------------------------------------------------------------------------- ------------------- ---------------
Income taxes payable 125,600 -
----------------------------------------------------------------------------------- ------------------- ---------------
TOTAL CURRENT LIABILITIES 4,831,500 1,975,700
----------------------------------------------------------------------------------- ------------------- ---------------
LONG-TERM LIABILITIES
-----------------------------------------------------------------------------------
Convertible notes payable 3,200,000 -
----------------------------------------------------------------------------------- ------------------- ---------------
TOTAL LIABILITIES 8,031,500 1,975,700
----------------------------------------------------------------------------------- ------------------- ---------------
Commitments and contingencies
-----------------------------------------------------------------------------------
SHAREHOLDERS' (DEFICIENCY) EQUITY
-----------------------------------------------------------------------------------
Preferred stock, $.001 par value; 1,000,000 shares authorized; no shares issued
and outstanding
Common stock, $.001 par value; 50,000,000 and 200,000,000 shares authorized,
respectively, 23,214,446 and 42,619,586 shares issued and outstanding,
respectively 20,000 39,200
----------------------------------------------------------------------------------- ------------------- ---------------
Additional paid-in capital 11,807,500 43,737,600
----------------------------------------------------------------------------------- ------------------- ---------------
Deferred compensation (491,400) (725,100)
----------------------------------------------------------------------------------- ------------------- ---------------
Accumulated deficit (13,336,400) (22,567,000)
----------------------------------------------------------------------------------- ------------------- ---------------
TOTAL SHAREHOLDERS' (DEFICIENCY) EQUITY (2,000,300) 20,484,700
----------------------------------------------------------------------------------- ------------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY $ 6,031,200 $ 22,460,400
----------------------------------------------------------------------------------- ------------------- ---------------
<FN>
**The accompanying notes are an integral part of these financial statements
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NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended THREE MONTHS ENDED Six Months ended SIX MONTHS ENDED
6/30/99 6/30/00 6/30/99 6/30/00
-------------------- -------------------- ------------------ ------------------
(unaudited) (UNAUDITED) (unaudited) (UNAUDITED)
-------------------- -------------------- ------------------ ------------------
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Net Revenues $ 1,189,100 $ 2,984,900 $ 1,878,400 $ 5,749,800
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Operating Expenses:
---------------------------------------
Cost of operations 408,800 1,921,800 732,200 3,695,300
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Sales and marketing 705,300 2,073,700 841,000 3,837,000
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Research and development 511,900 373,300 729,700 830,400
--------------------------------------- -------------------- -------------------- ------------------ ------------------
General and administrative 1,585,800 1,221,500 2,008,600 2,689,000
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Total Operating Expenses 3,211,800 5,590,300 4,311,500 11,051,700
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Loss From Operations (2,022,700) (2,605,400) (2,433,100) (5,301,900)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Interest income 36,900 221,000 39,500 247,000
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Interest expense (151,300) (181,200) (151,800) (278,900)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Deemed interest on settlement
agreement - (3,896,000) - (3,896,000)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Loss before income taxes (2,137,100) (6,461,600) (2,545,400) (9,229,800)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Income tax expense (800) - (101,600) (800)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Net Loss $ (2,137,900) $ (6,461,600) $ (2,647,000) $ (9,230,600)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Basic and diluted loss per common share $ ( 0.10 ) $ (0.15) $ (0.13) $ (0.25)
--------------------------------------- -------------------- -------------------- ------------------ ------------------
Weighted average common shares
outstanding 21,110,000 41,836,456 21,110,000 36,315,563
--------------------------------------- -------------------- -------------------- ------------------ ------------------
<FN>
**The accompanying notes are an integral part of these financial statements
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NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIENCY) EQUITY
Common Stock
-------------------
Additional Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
---------- ------- ------------------- -------------- ------------- ------------
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Balances, December 31, 1999,
(Audited) 23,214,446 $20,000 $ 11,807,500 $ (491,400) $(13,336,400) $(2,000,300)
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Exchange of convertible notes
payable and accrued interest 2,382,472 2,300 3,317,600 3,319,900
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Proceeds from the issuance of
common stock 632,472 600 834,300 834,900
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Deemed interest on settlement
agreement 3,896,000 3,896,000
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Deferred compensation 1,175,400 (1,175,400) -
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Amortization of deferred
compensation 941,700 941,700
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Conversion of trade payables to
common stock 778,982 800 1,557,200 1,558,000
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Issuance of common stock for
services 181,250 200 583,800 584,000
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Proceeds from sale of common stock,
net of costs of $2,409,100 15,416,633 15,300 20,549,800 20,565,100
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Issuance of common stock due to the
exercise of stock options 13,331 16,000 16,000
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Net loss (9,230,600) (9,230,600)
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
Balances, June 30, 2000 (unaudited) 42,619,586 $39,200 $ 43,737,600 $ (725,100) $(22,567,000) $20,484,700
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
<FN>
**The accompanying notes are an
integral part of these financial
statements
------------------------------------ ---------- ------- ------------------- -------------- ------------- ------------
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NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended SIX MONTHS ENDED
June 30, JUNE 30,
1999 2000
(Unaudited) (UNAUDITED)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,647,100) $ (9,230,600)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization 195,700 536,200
Allowance for doubtful accounts 119,100 177,000
Issuance of common stock for interest on convertible notes - 119,900
Issuance of common stock for services - 357,100
Compensation expense related to options granted 17,800 364,200
Interest expense related to settlement agreement - 2,400,000
Interest expense related to warrants granted 86,600 1,655,000
Changes in operating assets and liabilities:
Accounts receivable (396,800) (805,700)
Prepaid expenses and other assets (34,000) (187,500)
Accounts payable 1,955,900 (1,282,400)
Accrued expenses 564,900 113,800
Deferred revenue 22,900 -
Income taxes payable 100,000 (125,600)
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NET CASH USED IN OPERATING ACTIVITIES (14,900) (5,908,600)
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (41,100) 19,600
Capital expenditures (1,028,300) (354,400)
--------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,069,400) (334,800)
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligation under capital lease (3,700) (3,600)
Proceeds from issuance of note payable 5,000,000 -
Net proceeds from issuance of common stock 6,800 21,993,500
--------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,003,100 21,989,900
--------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,918,800 15,746,500
CASH AND CASH EQUIVALENTS, beginning of period 465,800 987,700
--------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 4,384,600 $ 16,734,200
==============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid:
Income taxes $ 1,600 $ 97,400
Interest $ 500 $ -
Noncash Operating and Financing Activities:
Issuance of common stock for accounts payable $ - $ 1,558,000
Issuance of common stock for convertible notes plus accrued interest $ - $ 3,319,900
Issuance of common stock for services $ - $ 584,000
Options granted for finders fee $ - $ 577,500
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NETTAXI.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
THE COMPANY
Nettaxi.com (formerly Nettaxi, Inc. and formerly Swan Valley Snowmobiles,
Inc.), the Company, is a Nevada corporation, incorporated on October 26,
1995. On September 29, 1998, the Company completed the acquisition of 100%
of the outstanding common stock of Nettaxi OnLine Communities, Inc., a
Delaware corporation, and changed its name to Nettaxi, Inc. The Company
changed its name to Nettaxi.com in June, 1999. For accounting purposes, the
acquisition has been treated as the acquisition of the Company by Nettaxi
OnLine Communities, Inc. with Nettaxi OnLine Communities, Inc. as the
acquiror. All shares and per share data prior to the acquisition have been
restated to reflect the stock issuance and related stock split.
As the former shareholders of Nettaxi OnLine Communities, Inc. received 85%
of the shares in the Company immediately after the acquisition, the
financial statements for periods prior to the reorganization are those of
Nettaxi OnLine Communities, Inc.
Effective May 7, 1999, the Company completed a merger in a single
transaction with Plus Net, Inc. by exchanging 7 million shares of its
common stock for all of the common stock of Plus Net, Inc. Each share of
Plus Net was exchanged for 1,000 shares of Nettaxi common stock.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interest under Accounting Principles Board Opinion No. 16.
For periods proceeding the merger, there were no intercompany transactions
that require elimination from the combined consolidated results of
operations and there were no adjustments necessary to conform the
accounting practices of the two companies.
Nettaxi OnLine Communities, Inc., was incorporated on October 23, 1997 to
capitalize on a significant opportunity that exists today through the
convergence of the media and entertainment industries with the vast
communications power of the Internet. The Company's Web site,
http://www.nettaxi.com, is an online community designed to seamlessly
integrate content with e-commerce services for the Company's subscribers,
providing comprehensive information about news, sports, entertainment,
health, politics, finances, lifestyle, and areas of interest to the growing
number of Internet users. The Company's mission is to establish Nettaxi.com
as an entry point, or portal, to the Internet by continuing to develop
premium online communities, which are both content-rich to its subscribers
and provide easy-to-use e-commerce services to businesses which reside in
these online communities.
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The Company's principal executive offices are located in Campbell,
California.
CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Nettaxi.com (formerly Nettaxi, Inc. and formerly Swan Valley
Snowmobile, Inc.) and its wholly-owned subsidiary, Nettaxi OnLine
Communities, Inc. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
BASIS OF PRESENTATION
The unaudited historical consolidated financial statements of Nettaxi.com
included herein have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include all information and footnotes
necessary for a complete presentation of Nettaxi.com results of operations,
financial position and cash flows.
The unaudited consolidated financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are,
in the opinion of management, necessary to state fairly the results for the
periods presented. The results for the six months ended June 30, 2000 are
not necessarily indicative of the results expected for the full fiscal
year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of 90 days or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company grants credit to its customers after undertaking an
investigation of credit risk for all significant amounts. An allowance for
doubtful accounts is provided for estimated credit losses at a level deemed
appropriate to adequately provide for known and inherent risks related to
such amounts. The allowance is based on reviews of losses, adjustment
history, current economic conditions and other factors that deserve
recognition in estimating potential losses. While management uses the best
information available in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future economic and
other conditions that may be beyond management's control.
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PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated economic useful lives of the
assets, as follows:
Estimated useful lives
------------------------
Furniture and fixtures. 5 years
Office equipment 5 years
Computers and equipment 3 years
Assets held under capital leases are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful lives of the
related assets.
PURCHASED TECHNOLOGY AND OTHER INTANGIBLES
The Company amortizes, on a straight-line basis, the cost of purchased
technology and other intangibles over the shorter of five (5) years or the
useful life of the related technology or underlying asset.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or
otherwise Marketed, software development costs are expensed as incurred
until technological feasibility has been established, at which time such
costs are capitalized until the product is available for general release to
customers. To date, the establishments of technological feasibility of the
Company's products and general release of such software have substantially
coincided. As a result, software development costs qualifying for
capitalization have been insignificant, and therefore, the Company has not
capitalized any software development costs.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenues are derived principally from the sale of banner
advertisements, web hosting services and from products from its online
malls. Advertising revenues are recognized in the period in which the
advertisement is delivered, provided that collection of the resulting
receivable is probable. Advertisers are charged on a per impression or
delivery basis up to a maximum as specified in the contract. To date, the
duration of the Company's advertising commitments has not exceeded one
year. When the Company guarantees a minimum number of impressions or
deliveries, revenue is recognized ratably in proportion to the number of
impressions or deliveries recorded to the minimum number of impressions and
deliveries guaranteed. Web hosting revenues are recognized in the period in
which the services are provided. Product revenue is recognized upon
shipment, provided no significant obligations remain and collectability is
probable.
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Advertising revenues include barter revenues, which are the exchange by
Nettaxi.com of advertising space on Nettaxi.com's web sites for reciprocal
advertising space on other web sites. Revenues from these barter
transactions are recorded as advertising revenues at the lower of the
estimated fair value of the advertisements received or delivered and are
recognized when the advertisements are run on Nettaxi.com's web sites.
Barter expenses are recorded when Nettaxi.com's advertisements are run on
the reciprocal web sites, which is typically in the same period as when
advertisements are run on Nettaxi.com's web sites. For the six months
ending June 30, 2000, barter revenues represented approximately 22% of
gross revenues as compared to 0% for the same time period in 1999.
In November 1999, the Financial Accounting Standards Board (FASB) issued
Emerging Issues Task Force (EITF) Issue 99-17 "Accounting for Advertising
Barter Transactions". Under EITF 99-17, revenues and expenses should be
recognized from advertising barter transactions at the fair value of the
advertising surrendered or received only when the company has a historical
practice of receiving or paying cash for such transactions. As of June 30,
2000, the Company was in compliance with EITF 99-17.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires an asset and liability approach. This approach results in
the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets
and liabilities. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are recovered or
settled. Future tax benefits are subject to a valuation allowance when
management believes it is more likely than not that the deferred tax assets
will not be realized.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. Advertising costs for the
six months ended June 30, 2000 and 1999, were approximately $3.0 million
and $234,100, respectively.
LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for impairment. When
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, the Company writes the asset down to its net
realizable value.
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FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amount reported in the consolidated balance sheets for
cash and cash equivalents approximates fair value.
SHORT-TERM DEBT:
The fair value of short-term debt approximates cost because of the
short period of time to maturity.
LONG-TERM DEBT:
The fair value of long-term debt is estimated based on current
interest rates available to the Company for debt instruments with
similar terms and remaining maturities.
RELATED PARTY NOTES RECEIVABLE AND PAYABLE:
The fair value of the notes receivable and notes payable to
shareholders is based on arms-length transactions and bear interest at
rates comparable to similar debt obligations.
At June 30, 2000 and December 31, 1999, the fair values of the
Company's debt instruments approximatedtheir historical carrying
amounts.
STOCK-BASED INCENTIVE PROGRAM
SFAS No. 123, Accounting for Stock-Based Compensation, encourages entities
to recognize compensation costs for stock-based employee compensation plans
using the fair value based method of accounting defined in SFAS No. 123,
but allows for the continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. The Company continues to use the
accounting prescribed by APB Opinion No. 25 and as such is required to
disclose pro forma net income (loss) and earnings (loss) per share as if
the fair value based method of accounting had been applied.
BASIC AND DILUTED LOSS PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
was effective December 28, 1997. Conforming to SFAS No. 128, the Company
changed its method of computing earnings per share and restated all prior
periods included in the consolidated financial statements. Basic loss per
common share is determined by dividing loss available to common
shareholders by the weighted average number of common shares outstanding.
Diluted per-common-share amounts assume the issuance of common stock for
all potentially dilutive equivalent shares outstanding. Anti-dilution
provisions of SFAS 128 require consistency between diluted per-common-share
amounts and basic per-common-share amounts in loss periods. For the periods
reported, there were no differences between basic and diluted earnings per
share. All share and per share information has been adjusted for the shares
exchanged for the common stock of Plus Net, Inc.
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ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No.
138, requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, which amends SFAS No. 133 to be effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material
impact on the Company's results from operations, financial position or cash
flows.
2. PURCHASED TECHNOLOGY AND OTHER INTANGIBLES
In November 1997, the Company issued a convertible secured promissory note
in the amount of $1,020,000 and 2,475,066 shares of common stock, valued at
$980,000, to a related party in exchange for certain fixed assets,
liabilities and technology. Core to the technology acquired was a web to
database software application and the underlying technology to the
Company's Internet The City products. Based on the fair market value of the
consideration exchanged, as determined by an independent appraisal service,
the aggregate purchase price was $2,000,000, and was allocated to the
following respective assets and liabilities based on their fair market
value at the time of the transaction:
Purchased technology $1,740,000
Other intangibles $ 150,000
Computers and equipment $ 100,000
Office equipment $ 45,000
Furniture and fixtures $ 5,000
Contracts payable and accrued expenses $ (40,000)
------------------------------------------ -----------
$2,000,000
========================================== ===========
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In 1998, the Company experienced several functional problems with portions
of the purchased technology, namely the web to database software
application, due to those components' incompatibility with subsequent
releases of upgraded versions of its operating system. Following attempts
to make these components compatible, the Company decided, in December 1998,
not to spend additional monies on these components but to replace them. As
approximately 50% of the components of the acquired technology were no
longer technically viable with the upgraded versions of the Company's
operating system and provided no alternative future use, the Company wrote
off the unamortized portion of the impaired technology, resulting in a
charge to expense of $667,000 in the fourth quarter of 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS
OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES",
"INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON
THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED
BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q
ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS
AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN
THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
OVERVIEW
We were incorporated in October 1997 and launched our web site in July
1998. We are a provider of content-rich and commerce-enabled communities that
offer subscribers, or "citizens", a place to build their home pages or
businesses on the Internet.
The Nettaxi.com web site, at http://www.nettaxi.com, is structured as a
virtual "urban" environment, populated by citizens, that is divided into
thematic "communities," and from there into "streets" and "homes." Nettaxi.com
provides access to information on news, sports, entertainment, health, politics,
finances, lifestyle, travel and other areas of interest, and services such as
free e-mail, personal home pages, chat and messages.
To date, our revenues have been derived principally from the sale of
advertisements. We sell a variety of advertising packages to clients, including
banner advertisements, event sponsorships, and targeted and direct response
advertisements. Currently, our advertising revenues are derived principally from
short-term advertising arrangements, averaging one to six months, in which we
guarantee a minimum number of impressions for a fixed fee. Advertising revenues
are recognized ratably in the period in which the advertisement is displayed,
provided that we have no significant remaining obligations and that collection
of the resulting receivable is probable. Payments received from advertisers
prior to displaying their advertisements on the site are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We expect to continue to derive the majority of our revenue for the
foreseeable future from the sale of advertising space on our web site.
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In the third quarter of 1999, we began providing web site hosting and
Internet connectivity services for corporate customers. Our services are
delivered through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers pay
monthly fees for the professional services utilized, one-time installation fees,
and connectivity charges. These "hosting" revenues are recognized in the period
the services are provided.
In addition to advertising revenues, we derive other revenues from
royalties from the distribution of our CD-ROM tutorial product and our
premium account membership subscriptions. Royalty revenues result from
relationships with computer manufacturers that bundle and distribute our
CD-ROM product with their products. Our membership programs offer premium
services for a monthly fee, providing additional services such as unlimited
personal e-mail accounts for family or friends, unlimited Nettaxi Site
Builder web pages, themed web page templates, a personal event calendar,
discussion groups, and options to customize personal homepages with pictures,
colors and content.
In May 1999, we completed the merger with Plus Net, Inc., a California
corporation, which has allowed us to provide our users with a web based e-mail
program and a robust meta search engine. Plus Net also has an e-commerce
processing engine which enables the acceptance and processing of online credit
card transactions. We believe this merger also enhances our electronic commerce
and advertising opportunities. As a result of this merger, we received
revenues from credit card processing fees during the first half of 1999, with
minimal revenues being earned in the third quarter of 1999. The contract through
which these fees have been derived terminated in December 1999 and we
anticipate that revenues of this type will be minimal in the foreseeable future.
We also receive revenues from e-commerce transactions. Our recent
e-commerce arrangements generally provide us with a share of any sales resulting
from direct links from our site. Revenues from these programs will be recognized
in the month that the service is provided. To date, revenues from e-commerce
arrangements have not been material. However, we expect e-commerce derived
revenues to become a more significant portion of our total revenues in the
foreseeable future, as we increase the number of contractual relationships with
parties offering e-commerce related products and services which can be made
available to our subscribers and parties seeking to make online sales to our
subscribers and other visitors to our site.
To date, we have entered into business and technology license arrangements
in order to build our web site community, provide community-specific content,
generate additional traffic, and provide our subscribers with additional
products and services, including e-commerce tools.
We intend to continue to investigate potential acquisitions and to seek
additional relationships with content providers that fall within the scope of
our business strategy, and will serve to increase our subscriber base and
overall site traffic. Acquisitions carry numerous risks and uncertainties and we
cannot guarantee that we will be able to successfully integrate any businesses,
products, technologies or personnel that might be acquired in the future.
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RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND
1999.
NET REVENUES. Revenues for the second quarter of 2000 increased to
approximately $3.0 million compared to $1.2 million during the same period of
1999. The period-to-period growth resulted from additional revenues derived as
a result of providing Internet web hosting and connectivity services for
corporate customers beginning in the third quarter of 1999. Advertising
revenues also increased as a result of the increase in the number of
advertisers, the average contract duration, and value offered (higher web site
traffic to nettaxi.com web pages). Revenues for the second quarter in 1999
consisted primarily of transaction processing fees derived from credit card
evaluations and from the processing of on-line credit card transactions. There
were no transaction processing fees in 2000. Barter revenues, which are
included in advertising revenues, accounted for approximately 22% of total
revenues for the second quarter of 2000. There were no barter revenues for the
second quarter of 1999. We believe that barter revenues will continue to be
significant for the foreseeable future. Four customers each accounted for in
excess of 10% of our net revenues for the three months ended June 30, 2000.
There were no customers with revenues greater than or equal to 10% of our net
revenues for the three months ended June 30, 1999.
ADVERTISING REVENUES. Advertising revenues were approximately $2.1
million for the second quarter of 2000 compared to $0.3 million for the
same period in1999, which represented approximately 72% and 28%,
respectively, of total net revenues. The absolute dollar increases resulted
from an increase in the number of advertisers as well as the increase in
average contract commitments of these advertisers as a result of increased
web traffic to our web site. We cannot predict whether advertisers will
either increase or decrease their activity at the site.
TRANSACTION PROCESSING FEES. Transaction processing fees, which
consist of revenue derived from credit card evaluations and from the
processing of on-line credit card transactions were approximately $0.9
million for the three months ended June 30, 1999. We received no
transaction processing fees in the second quarter of 2000. The contract
through which we derived these fees transmitted in December 1999, and we do
not expect revenues of this type to be significant in future periods.
HOSTING REVENUES. Hosting revenues were approximately $0.8 million for
the second quarter of 2000 or 28% of total net revenues for the period.
There were no hosting revenues in the second quarter of 1999. We began
providing internet web hosting and connectivity services for corporate
customers in the third quarter of 1999. Web hosting services are delivered
through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers
pay monthly fees for the professional services utilized, one-time
installation fees, and monthly connectivity charges. These "hosting"
revenues are recognized in the period the services are provided.
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COST OF OPERATIONS. Cost of operations for the second quarter of 2000
increased to $1.9 million compared to $0.4 million for the second quarter of
1999. The increase was primarily attributed to fees paid to third parties
related to increased costs for co-location expenses (Internet connection
charges). In the third quarter of 1999, we began providing Internet
connectivity services to corporate customers, which demanded purchases of
additional bandwidth. These costs are expected to continue to increase, as our
web traffic increases and our corporate customers require additional bandwidth
for our "citizens". Other items contributing to higher costs were equipment
costs and depreciation, amortization of intangible assets, and expenses for
third party content and development.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the second
quarter of 2000 increased to $2.1 million compared to $0.7 million for the
second quarter of 1999. Sales and Marketing expenses consisted primarily of
investments in sales and marketing personnel, marketing, promotion, advertising
and related costs. The absolute dollar increases in sales and marketing
expenses were mostly related to expansion of online and print advertising,
public relations and other promotional expenditures, and expenditures related to
barter transaction and related expenses required to implement our marketing
strategy.
We expect sales and marketing expenses to increase significantly in future
periods. These increases will be principally related to increased spending on
advertising in a variety of media to increase brand awareness and attract
additional visitors to the Web site. There can be no assurance that these
increased expenditures will result in increased visitors to our Web site or
additional revenues. Also to a lesser extent, we expect sales and marketing
expenses to increase as a result of increased cost of hiring additional sales
and marketing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the second quarter of 2000 decreased to $0.4 million compared to $0.5 million
for the second quarter of 1999. The reduction were attributable to cost savings
implemented by us including a decrease in the use of consultants. We will
continue to implement cost saving programs but cannot assure that these programs
will be effective or that future cost savings will be realized.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for executives,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses for the second
quarter of 2000 decreased to $1.2 million for the second quarter of 2000
compared to $1.6 million during the same period in 1999. The decreases in
absolute dollars were primarily due to our implementation of cost controls
throughout the entire company which was partially offset by an increase in legal
fees relating to the settlement with the holder of the convertible debentures.
We expect general and administrative expenses to grow, however, as we hire
additional personnel and incur additional expenses related to the growth of our
business and our operations as a public company.
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INTEREST INCOME AND EXPENSE. Net interest income for the second quarter of
2000 was $39,800 compared to a net interest expense of $114,400 during the same
period in 1999. Interest expense was primarily due to the convertible promissory
note that we issued on March 31, 1999 and to amortization of deferred interest
related to warrants issued in conjunction with this convertible promissory note.
For the three months ended June 30, 2000 however, this expense was offset by
additional interest income resulting from our higher average cash balance in
2000 compared to 1999. The higher average cash balance resulted from our
completion of a private placement of common stock that raised approximately $23
million in the first quarter of 2000. Interest expense also decreased in the
second quarter of 2000 as a result of the conversion of the convertible
promissory note in that quarter.
DEEMED INTEREST EXPENSE. We recognized deemed interest expense of
approximately $3.9 million in the second quarter of 2000. This non-cash
interest expense resulted from the implied beneficial conversion feature and the
value of warrants issued in connection with the settlement agreement that we
reached with the holder of Convertibles debentures.
RESULTS OF OPERATIONS - COMPARISON OF THE RESPECTIVE SIX MONTHS ENDED JUNE 30,
2000 AND 1999.
NET REVENUES. Revenues for the six months ended June 30, 2000 increased to
approximately $5.7 million compared to $1.9 million during the same period of
1999. The period-to-period growth resulted from additional revenues derived as a
result of providing Internet web hosting and connectivity services for corporate
customers beginning in the third quarter of 1999. Advertising revenues also
increased as a result of the increase in the number of advertisers, the average
contract duration, and value offered (higher web site traffic to nettaxi.com web
pages). Revenues for the six months in 1999 consisted primarily of transaction
processing fees derived from credit card evaluations and from the processing of
on-line credit card transactions. There were no transaction processing fees in
2000. Barter revenues, which are included in advertising revenues, accounted for
approximately 22% of total revenues for the six months of 2000. There were no
barter revenues for the six months of 1999. We believe that barter revenues will
continue to be significant for the foreseeable future. Four customers each
accounted for in excess of 10% of our net revenues for the six months ended June
30, 2000. There were no customers with revenues greater than or equal to 10% of
our net revenues for the six months ended June 30, 1999.
ADVERTISING REVENUES. Advertising revenues were approximately $3.9
million for the six months of 2000 compared to $0.5 million for the same period
of 1999, which represented approximately 68% and 26% of total net revenues. The
absolute dollar increases resulted from an increase in the number of advertisers
as well as the increase in average contract commitments of these advertisers as
a result of increased web traffic to our web site. The Company cannot assure
that advertisers will either increase or decrease their activity at the site.
Additionally, the Company cannot predict certain factors that could lower the
advertising prices currently in effect.
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TRANSACTION PROCESSING FEES. Transaction processing fees were approximately
$1.3 million for the six months ended June 30, 1999. There were no transaction
processing fees in 2000. Transactions fees consist of revenue derived from
credit card evaluations and from the processing of on-line credit card
transactions. The 1999 revenue is attributable to the merger with Plus Net, Inc.
in 1999. The Company does not expect revenues of this type to be significant in
the future periods.
HOSTING REVENUES. Hosting revenues were approximately $1.8 million for the
six months of 2000 or 32% of total net revenues. There were no hosting revenues
in the six months of 1999. The Company began providing internet web hosting and
connectivity services for corporate customers in the third quarter of 1999. Web
hosting services are delivered through a state-of-the-art Internet data center
located in Southern California using a high-performance Internet backbone
network. Customers pay monthly fees for the professional services utilized,
one-time installation fees, and monthly connectivity charges. These "hosting"
revenues are recognized in the period the services are provided.
COST OF OPERATIONS. Cost of operations for the six months of 2000
increased approximately $3.0 million to $3.7 million compared to $0.7 million
for the six months of 1999. The increase was primarily attributed to fees paid
to third parties related to increased costs for co-location expenses (Internet
connection charges). In the third quarter of 1999, the Company began providing
Internet connectivity services to corporate customers, which demanded purchases
of additional bandwidth. These costs are expected to continue to increase, as
our web traffic increases and our corporate customer require additional
bandwidth for our "citizens". Other items contributing to higher costs were
equipment costs and depreciation, amortization of intangible assets, and
expenses for third party content and development.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the six
months of 2000 increased $3.0 million to $3.8 million compared to $0.8 million
for the six months of 1999. Sales and Marketing expenses consisted primarily of
investments in sales and marketing personnel, marketing, promotion, advertising
and related costs. The absolute dollar increases in sales and marketing
expenses were mostly related to expansion of online and print advertising,
public relations and other promotional expenditures, expenditures related to
barter transactions, and related expenses required to implement our marketing
strategy.
The Company expects sales and marketing expenses to increase significantly
in future periods. These increases will be principally related to increased
spending on advertising in a variety of media to increase brand awareness and
attract additional visitors to the Web site. There can be no assurance that
these increased expenditures will result in increased visitors to our Web site
or additional revenues. Also to a lesser extent, we expect sales and marketing
expenses to increase as a result of increased cost of hiring additional sales
and marketing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the six months of 2000 increased $0.1 million to $0.8 million compared to $0.7
million for the six months of 1999. The absolute dollar increase were due to
investments in web architecture and development costs in the first quarter of
2000 offset by the lower utilization of consultants by the Company and other
cost savings implemented by the Company. The Company will continue to implement
cost saving programs but cannot assure that these programs will be effective or
that future cost savings will be realized.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for executives,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses for the six
months of 2000 increased approximately $0.7 million to $2.7 million for the six
months of 2000 compared to $2.0 million during the same period of 1999 partially
due to an increase in legal fees relating to the settlement agreement with the
holder of convertible debentures. We expect general and administrative expenses
to grow as we hire additional personnel and incur additional expenses related to
the growth of our business and our operations as a public company.
INTEREST EXPENSE. Net interest expense for the six months of 2000 was
$31,900 compared to $112,300 during the same period of 1999. The decrease in net
interest expense was primarily the result of the conversion of the note in the
second quarter 2000. Also, the Company realized additional interest income as a
result of higher average cash balance in the 2000 compared to 1999 as a result
of the completion of a private placement of its common stock raising
approximately $23 million in the first quarter of 2000.
DEEMED INTEREST EXPENSE. We recognized deemed interest expense of
approximately $3.9 million for the first six months of 2000. This non-cash
interest expense resulted from the implied beneficial conversion feature, and
the value of warrants issued, in connection with the settlement agreement tha we
reached with the holder of the convertible debentures.
INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately $11.20
million for Federal income tax purposes. These benefits expire through 2019.
Pursuant to a "change in ownership" as defined by the provisions of the Tax
Reform Act of 1986, utilization of our net operating loss carryforwards may be
limited if a cumulative change of ownership of more than 50% occurs over a
three-year period. We have not determined if an ownership change has occurred.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash and cash equivalents of approximately
$16.7 million, compared to approximately $1.0 million at December 31, 1999. The
increase in cash was due to the completion of our private placement February
2000.
Net cash used in operating activities equaled approximately $5.9 million
and $14,900 for the six-month periods ended June 30, 2000 and 1999,
respectively. We had significant negative cash flows from operating activities
for the six month period ended June 30, 2000, primarily from our net operating
losses, adjusted for non-cash items, and increases in accounts receivable
balances due to the time lag between revenue recognition and the receipt of
payments from advertisers and decreases in accounts payable.
Net cash used in investing activities was approximately $0.3 and $1.1
million for the six-month periods ended June 30, 2000 and 1999, respectively.
Substantially all of the cash used in investing activities for both periods was
primarily related to the purchase of capital equipment in connection with the
build out of our web site and infrastructure. We expects to continue to
purchase capital equipment to meet our needs.
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Net cash provided by financing activities was approximately $22.0 million
and $5.0 million for the six month periods ended June 30, 2000 and 1999,
respectively. Net cash provided by financing activities in 2000 consisted
primarily of net proceeds from the February private placement of our common
stock and warrants. Net cash provided by financing activities for the six
months ended June 30, 1999 consisted of issuance of a promissory note and to a
lesser extent the issuance of common stock.
We incurred net losses of approximately $9.2 million and $2.6 million for
the six months ended June 30, 2000, and 1999, respectively. At June 30, 2000, we
had an accumulated deficit of approximately $22.6 million. In the six months
ended June 30, 2000, we recognized a non-cash interest expense of approximately
$3.9 million resulting from the implied beneficial conversion feature, and the
value of warrants issued, in connection with the settlement agreement that we
reached with the holder of the convertible debentures. The net losses and
accumulated deficit also resulted from the significant operational,
infrastructure and other costs incurred in the development and marketing of our
services and the fact that revenues failed to keep pace with such costs. As a
result of our expansion plans and our expectation that our operating expenses,
especially in the areas of sales and marketing, will continue to increase
significantly, we expect to incur additional losses from operations for the
foreseeable future. To the extent that increases in our operating expenses
precede or are not subsequently followed by commensurate increases in revenues,
or that we are unable to adjust operating expense levels accordingly, our
business, results of operations and financial condition would be materially and
adversely affected. There can be no assurance that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future.
Our cash requirements depend on numerous factors, including market
acceptance of our services, the capital required to maintain and grow our web
site, the resources required for marketing and selling our services and to
increase brand awareness and other factors. We have experienced a substantial
increase in our capital expenditures since our inception consistent with the
growth in our operations and staffing. Additionally, we continue to evaluate
possible investments in businesses, products and technologies, some of which may
be material. Since our inception, we have incurred significant operating losses
and we believe we will continue to incur operating losses for the foreseeable
future. We expect that we will continue to experience negative operating cash
flows for the foreseeable future as result of our operating losses. We believe
that our current cash and cash equivalents and short-term investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for our existing business for the next 12 months. We cannot assure
you that we will be able to achieve and sustain positive cash flow or
profitability. We may need to raise additional funds during 2001 for future
expansion of our business, to develop new or enhanced services or products, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. We cannot assure you that additional financing will
be available on terms favorable to us, or at all.
IMPACT OF THE YEAR 2000
In our previous filings with the Securities and Exchange Commission, we
have discussed the nature and progress of our plans to deal with potential Year
2000 problems. These problems arise from the fact that many currently installed
computer systems and software products were coded to accept or recognize only
two digit entries in the date code field. These systems may recognize a date
using "00" as the year 1900 rather than the year 2000. As a result, computer
systems and/or software used by many companies and governmental agencies needed
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Prior to
December 31, 1999, we completed our assessment of all material information
technology and non-information technology systems at our headquarters, as well
as our review of Year 2000 compliance by our key vendors, distributors and
suppliers. To date, we have experienced no significant disruptions in mission
critical information technology and non-information technology systems and we
believe those systems successfully responded to the Year 2000 date changes. We
are not aware of any material problems resulting from Year 2000 issues, either
with our own internal systems or the products and services of third parties. We
will continue to monitor our mission critical computer applications and those of
our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND
EXPECT LOSSES FOR THE FORESEEABLE FUTURE
We were incorporated in October 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. Since
our inception, we have incurred net losses, resulting primarily from costs
related to developing our web site, attracting users to our web site and
establishing the Nettaxi.com brand. At June 30, 2000, we had an accumulated
deficit of $22,567,000. Losses have continued to grow faster than our revenues
during our limited operating history. This trend is reflective of our continued
investments in technology and sales and marketing efforts to grow the business.
Because of our plans to continue to invest heavily in marketing and promotion,
to hire additional employees, and to enhance our web site and operating
infrastructure, we expect to incur significant net losses for the foreseeable
future. We believe these expenditures are necessary to strengthen our brand
recognition, attract more users to our web site and generate greater online
revenues. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater. We
may never achieve profitability. If we do achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis.
WE MAY REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES
We currently believe that we have sufficient cash to fund our operations
through the next twelve months. After that time, we may be required to seek
additional capital to sustain our operations. We have experienced a substantial
increase in our capital expenditures since our inception consistent with the
growth in our operations and staffing. Additionally, we continue to evaluate
possible investments in businesses, products and technologies, some of which may
be material. Since our inception, we have incurred significant operating losses
and we believe we will continue to incur operating losses for the foreseeable
future. We expect that we will continue to experience negative operating cash
flows for the foreseeable future as result of our operating losses. We believe
that our current cash and cash equivalents and short-term investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for our existing business for the next 12 months. We cannot assure
you that we will be able to achieve and sustain positive cash flow or
profitability or that we will have other sources available to provide the
financial resources necessary to continue our operations. We may need to raise
additional funds during 2001 for future expansion of our business, to develop
new or enhanced services or products, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. We cannot assure
you that additional financing will be available on terms favorable to us, or at
all. If we are unsuccessful in generating anticipated resources from one or
more of the anticipated sources, and unable to replace the shortfall with
resources from another source, we may be able to extend the period for which
available resources would be adequate by deferring the creation or satisfaction
of various commitments, deferring the introduction of various services or entry
into various markets, and otherwise scaling back operations. If we are unable
to generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected.
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OUR NEED TO RAISE ADDITIONAL CAPITAL MAY CAUSE OUR STOCKHOLDERS TO EXPERIENCE
SIGNIFICANT DILUTION IN THE FUTURE
It is likely that we will need to raise additional funds in the future in
order to pursue our business objectives. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common stock. This may make an investment in our common stock
less attractive to other investors, thereby weakening the trading market for our
common stock.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES FREQUENTLY ENCOUNTERED BY EARLY
STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS
Due to our limited operating history, we are subject to many of the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. Among other things, we are faced
with the need to establish our credibility with customers, advertising, content
providers, and companies offering e-commerce products and services, and such
parties are often understandably reluctant to do business with companies that
have not had an opportunity to establish a track record of performance and
accountability. For example, our ability to enter into exclusive relationships
to provide content over the Internet will be dependent on our ability to
demonstrate that we can handle high volumes of traffic through our site.
Similarly, early stage companies must devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
also make significant investments to establish brand recognition. If we are
unable to overcome some of these obstacles, we may be unable to achieve our
business goals and raise sufficient capital to expand our business.
OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE
CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES
We had revenues of approximately $5,749,800 and $1,878,400 for the six
months ended June 30, 2000 and 1999, respectively. While our growth rate has
been strong, it is unlikely that revenue will continue to grow at this rate
in the future and our performance during these periods should not be taken
as being indicative of future trends. Accurate predictions regarding our
revenues in the future are difficult and should be considered in light of
our limited operating history and rapid changes in the ever evolving Internet
market. For example, our ability to generate revenues in the future is
dependent in part on the success of our capital-raising efforts and the
investments that we intend to make in sales and marketing, infrastructure,
and content development. Our revenues for the foreseeable future will
remain primarily dependent on the number of customers that we are able to
attract to our web site, and secondarily on sponsorship and advertising
revenues. We cannot forecast with any degree of certainty the number of
visitors to our web site, the number of visitors who will become customers, or
the amount of sponsorship and advertising revenues. Similarly, we cannot
provide any guarantees regarding the revenues that will be generated from
e-commerce products and services that we intend to make available on our site.
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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
In addition to the uncertainties regarding the rate of growth of our future
revenues, we anticipate that our operating results will fluctuate significantly
from quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that may emerge in Internet e-commerce and advertising spending. For
example, we believe that the use of our web site will be somewhat lower during
periods of the year if the patterns that currently effect traditional media,
such as television and radio where advertising sales are lower during the first
and third calendar quarters because of the summer vacation period and post
winter holiday season slowdown, develop in the Internet industry. It is likely
that similar seasonal patterns will develop in the Internet industry and thus
result in decreasing revenues for us during periods of the year. Quarterly
results may also vary for some of the same reasons and because it is difficult
to predict the long-term revenue growth of our business. If investments in
marketing and content development are delayed, we may experience corresponding
delays in anticipated revenues from such investments, thereby leading to uneven
quarterly results. Because of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of investors
in future periods, then our stock price may decline.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
As of June 30, 2000, 42,619,586 shares of our common stock were
outstanding and 6,163,533 shares of common stock were subject to options granted
under our 1998 and 1999 Stock Option Plans and otherwise of the outstanding
shares, 11,487,250 shares of our common stock were immediately eligible
for sale in the public market without restriction or further restriction
under the Securities Act of 1933, unless purchased by or issued to any
"affiliate" of ours, as that term is defined in Rule 144 promulgated
under that Act. All other outstanding shares of our common stock are
"restricted securities" as such term is defined under Rule 144, in that such
shares were issue din private transactions not involving a public offering and
may not be sold in the absence of registration other than in accordance with
Rules 144, 144(k) or 701 promulgated under the Securities Act of 1933 or another
exemption from registration. As of June 30, 2000, approximately 21 million
shares of common stock were eligible for sale under Rule 144. If our
stockholders sell substantial amounts of our common stock under Rule 144, the
market price of our common stock could be adversely affected and our ability
to raise additional capital at that time through the sale of our securities
could be impaired.
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FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS
There are currently warrants to purchase 2,200,000 shares of our common
stock outstanding and exercisable over the next five years at an exercise price
per share of $1.50, subject to adjustment. There are also warrants to purchase
269,692 shares of common stock outstanding and exercisable over the next four
and a half years at an exercise price per share of $4.38, subject to
adjustment. The shares underlying these warrants have been registered for
resale pursuant to our registration statement on Form S-1 (File No. 333-38538).
Pursuant to another registration statement on Form S-1 (File No. 333-36826) we
registered shares underlying warrants to purchase 15,567,133 shares of common
stock issued having an exercise price per share of $4.00, warrants to purchase
436,351 shares of common stock having an exercise price per share of $2.76 and
warrants to purchase 50,000 shares of common stock having an exercise price per
share of $12.38. Pursuant to a third registration statement on Form S-1 (File
No. 333-30074), we registered warrants to purchase 125,000 shares of common
stock having an exercise price of $8.00 per share. If the holders of our
outstanding warrants and other convertible securities were to exercise their
rights, purchasers of our common stock could experience substantial dilution of
their investment.
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE
We plan to pursue aggressive marketing campaigns online and in traditional
media to promote the Nettaxi.com brand and attract an increasing number of
visitors to our web site. We believe that maintaining and strengthening the
Nettaxi.com brand will be critical to the success of our business. This
investment in increased marketing carries with it significant risks, including
the following:
- Our advertisements may not properly convey the Nettaxi.com brand
image, or may even detract from our image. Advertising in print and
broadcast media is expensive and is often typically difficult to modify
quickly in order to take into account feedback that may indicate that we
have failed to convey the optimal message. If our advertisements fail to
positively promote our brand and image, the damage to our business may be
long-lasting and costly to repair.
- Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our web site
at levels commensurate with their costs. We may fail to choose the optimal mix
of television, radio, print and other media to cost effectively deliver our
message. Moreover, if these efforts are unsuccessful, we will face difficult and
costly choices in deciding whether and how to redirect our marketing dollars.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
SPONSORSHIP AND ADVERTISING REVENUES
To date, we have relied principally on outside advertising agencies to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. Our internal sales team
currently has nine members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected by our inability to attract sponsorship and
advertising revenues.
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WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR
ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO
MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES
We depend on third parties for important aspects of our business,
including Internet access, the development of software for new web site
features, content, and telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms, and there is no guarantee that we will be
able to renew these agreements at all. Further, we cannot be sure that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively.
WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND
ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS
We maintain substantially all of our computer systems at our Campbell,
California site and the Santa Clara, California site of Exodus Communications.
We are heavily reliant on the ability of Exodus to house and service our web
site. This system's continuing and uninterrupted performance is critical to our
success. Growth in the number of users accessing our web site may strain its
capacity, and we rely on Exodus to upgrade our system's capacity in the face of
this growth. Exodus also provides our connection to the Internet. Sustained or
repeated system failures or interruptions of our web site connection services
would reduce the attractiveness of our web site to customers and advertisers,
and could therefore have a material and adverse effect on our business due to
loss of membership and advertising revenues.
In 1998 and 1999, we experienced several interruptions and degradations of
service as a result of our third party service provider's inability to deliver
the contractual bandwidth required to handle our traffic volume. These
interruptions result in decreased web usage volume and therefore impact our
ability to serve advertising impressions for our customers. These interruptions
can materially impact our revenues. We estimate that during 1998 we lost
approximately $35,000 in revenue because of this, and during 1999 we lost an
additional $35,000 in revenues.
In addition, our operations are dependent in part on our ability to protect
our operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins or other similar events.
Furthermore, our servers are vulnerable to computer viruses, break-ins and
similar disruptive problems. The occurrence of any of these events could result
in interruptions, delays or cessations in service to our users and result in a
decrease in the number of visitors to our site. Our insurance policies
may not adequately compensate us for any losses that may occur due to any
failures or interruptions in our systems.
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WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT
Our business plan contemplates a period of significant expansion. In order
to execute our business plan, we must grow significantly. This growth
will strain our personnel, management systems and resources. To manage our
growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. These individuals have had little
experience working with our management team. We cannot be sure that we will
be able to integrate new executives and other employees into our organization
effectively. In addition, there will be significant administrative burdens
placed on our management team as a result of our status as a public company. If
we do not manage growth effectively, we will not be able to achieve our
financial and business goals.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our
Chief Operating Officer. We do not currently maintain "key person" insurance
on the lives of Messrs. Rositano. The loss of the services of any of our
executive officers could materially and adversely affect our business
due to their experience with our business plan and the disruption in the
conduct of our day-to-day operations. Additionally, we believe we will need to
attract, retain and motivate talented management and other highly skilled
employees to be successful. Competition for employees that possess
knowledge of both the Internet industry and our target market is intense. We
may be unable to retain our key employees or attract, assimilate and
retain other highly qualified employees in the future.
OUR PROJECTED E-COMMERCE SERVICES MAY NOT BE LAUNCHED ON A TIMELY BASIS AND MAY
NOT GENERATE THE ANTICIPATED LEVEL OF REVENUES
Our strategic growth plan calls for development and implementation of
e-commerce tools for our citizens. The availability of many of these tools is
dependent on our ability to enter into satisfactory contractual relationships
with parties offering e-commerce related products and services which can be
made available to our subscribers, as well as relationships with parties
seeking to make online sales to our subscribers and other visitors to our
site. To date, our revenues from e-commerce services have not been material,
and we have yet to launch a number of the services that we hope to provide to
our citizens and visitors to the our site. We may not be able to commence those
services on a timely basis, and there is no assurance that the services will
generate the anticipated amount of revenues.
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INTENSE COMPETITION FROM OTHER INTERNET-BASED BUSINESSES MAY REDUCE OUR MARGINS
AND MARKET SHARE AND CAUSE OUR STOCK PRICE TO DECLINE
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software.
Competition could result in price reductions for our products and services,
reduced margins or loss of market share. Consolidation within the online
commerce industry may also increase competition.
We currently or potentially compete with a number of other companies
including a number of large online communities and services that have expertise
in developing online commerce, and a number of other small services, including
those that serve specialty markets. Many of our potential competitors have
longer operating histories, larger customer bases, greater brand recognition in
other business and Internet markets and significantly greater financial,
marketing, technical and other resources than us.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES
We intend to establish numerous strategic relationships with popular web
sites to increase the number of visitors to our web site. There is intense
competition for placements on these sites, and we may not be able to enter into
these relationships on commercially reasonable terms or at all. Even if we enter
into relationships with other web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships and expand our existing ones could have a material and adverse
effect on our business due to our inability to increase the number of users of
our site.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
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To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our web site. We
could incur substantial, unanticipated costs if we need to modify our web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our web-savvy audience for new services, products and
enhancements, our users may not use our web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS
Our Nettaxi.com brand and our web address, www.nettaxi.com, are critical to
our success. We have filed a trademark application for "Nettaxi", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring web addresses that are confusingly similar to our
addresses, which could harm our business. Also, while we have entered into
confidentiality agreements with our employees, contractors and suppliers in
order to safeguard our trade secrets and other proprietary information, there
can be no assurance that technology will not be misappropriated or that others
may lawfully develop similar technologies.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD PARTY SYSTEMS ARE NOT YEAR 2000-COMPLIANT
We have not devised a Year 2000 contingency plan. Although we did not
experience any Year 2000-related problems on January 1, 2000, and have not
experienced any such problems to date, the failure of our internal systems, or
any material third party systems, to be Year 2000-compliant could have a
material and adverse effect on our business, results of operations and financial
condition if the compliance problems significantly impair access to and use of
our web site.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions
has been a successful strategy used by other Internet companies. On July 13,
2000, we signed a letter of intent to merge with GoHip, a privately held direct
marketing firm and Web Portal, but do not have any present understanding
relating to any other such acquisition or investment. If we were to buy a
content, service or technology company, the amount of time and level of
resources required to successfully integrate their business operation could be
substantial. The challenges in assimilating their people and organizational
structure, and in encountering potential unforeseen technical issues in
integrating their content, service or technology into ours, could cause
significant delays in executing other key areas of our business plan. This
could include delays in integrating other content, services or technology into
our communities, or moving forward on other business development relationships,
as management and employees, both of which are time constrained, may be
distracted. In addition, the key personnel of the acquired company may decide
not to work for us, which could result in the loss of key technical or business
knowledge to us. Furthermore, in making an acquisition, we may have to incur
debt or issue equity securities to finance the acquisition, the issuance of
which could be dilutive to our existing shareholders.
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WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes in respect of
transactions engaged in by customers on our web site. However, various states
or foreign countries may seek to impose sales tax obligations on us and other
e-commerce and direct marketing companies. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and cause purchasing through our
web site to be less attractive to customers as compared to traditional retail
purchasing. The United States Congress has passed legislation limiting for three
years the ability of the states to impose taxes on Internet-based transactions.
Failure to renew this legislation could result in the imposition by various
states of taxes on e-commerce. Further, states have attempted to impose sales
taxes on catalog sales from businesses such as ours. A successful assertion by
one or more states that we should have collected or be collecting sales taxes on
the sale of products could have a material and adverse effect on our business
due to the imposition of fines or penalties or the requirement that we pay for
the uncollected taxes.
WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS
At December 31, 1999 we had net operating loss carryforwards available to
reduce future taxable income that aggregated approximately $11,200,000
for Federal income tax purposes. These benefits expire through 2019. Pursuant
to a "change in ownership" as defined by the provisions of the Tax Reform
Act of 1986, utilization of our net operating loss carryforwards may be
limited, if a cumulative change of ownership of more than 50% occurs within a
three-year period. We have not determined if an ownership change has occurred.
If it has, we may not be able to take full advantage of potential tax
benefits from our net operating loss carry forwards.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if web
usage and e-commerce does not continue to grow. Internet usage may be inhibited
for a number of reasons, including inadequate Internet infrastructure,
security concerns, inconsistent quality of service, the unavailability of
cost-effective, high-speed service, the imposition of transactional taxes,
or the limitation of third party service provider's ability and willingness
to invest in new or updated equipment to handle traffic volume.
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If web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. We are highly dependant on third party service providers. Any
interruption experienced by these service providers may have a material impact
on our business due to our inability to serve our advertising customers or end
users. In addition, web sites, including ours, have experienced a variety of
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, web usage, including usage of our web site,
could grow slowly or decline. This may have a material impact on future
revenues.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH
IS UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Internet as an effective medium of commerce by
consumers. Rapid growth in the use of the Internet and commercial online
services is a recent phenomenon. Demand for recently introduced services and
products over the Internet and online services is subject to a high level of
uncertainty. The development of the Internet and online services as a viable
commercial marketplace is subject to a number of factors. For example,
e-commerce is at an early stage and buyers may be unwilling to shift their
purchasing from traditional vendors to online vendors, there may be insufficient
availability of telecommunication services or changes in telecommunication
services could result in slower response times and adverse publicity and
consumer concerns about the security of commerce transactions on the Internet
could discourage its acceptance and growth.
ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to further develop due to the loss of anticipated revenues.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB
ADVERTISING AND SUBJECT US TO LIABILITY
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant barrier
to e-commerce and communications over the Internet. Any well-publicized
compromise of security could deter more people from using the Internet or from
using it to conduct transactions that involve transmitting confidential
information, such as purchases of goods or services. Furthermore, decreased
traffic and e-commerce sales as a result of general security concerns could
cause advertisers to reduce their amount of online spending. To the
extent that our activities or the activities of third party contractors
involve the storage and transmission of proprietary information, such as
credit card numbers, security breaches could disrupt our business, damage our
reputation and expose us to a risk of loss or litigation and possible
liability. We could be liable for claims based on unauthorized purchases
with credit card information, impersonation or other similar fraud claims.
Claims could also be based on other misuses of personal information, such as for
unauthorized marketing purposes. We may need to spend a great deal of money
and use other resources to protect against the threat of security breaches or
to alleviate problems caused by security breaches.
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WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE
We may be subjected to claims for defamation, negligence,
copyright or trademark infringement or based on other theories relating to the
information we publish on our web site. These types of claims have been
brought, sometimes successfully, against Internet companies as well as print
publications in the past. Based on links we provide to other web sites, we
could also be subjected to claims based upon online content we do not control
that is accessible from our web site. Claims may also be based on statements
made and actions taken as a result of participation in our chat rooms or as a
result of materials posted by members on bulletin boards at our web site. We
also offer e-mail services, which may subject us to potential risks, such
as liabilities or claims resulting from unsolicited e-mail, lost or
misdirected messages, illegal or fraudulent use of e-mail, or
interruptions or delays in e-mail service. These claims could result in
substantial costs and a diversion of our management's attention and
resources.
Efforts to regulate or eliminate the use of mechanisms which automatically
collect information on users of our web site may interfere with our ability to
target our marketing efforts and tailor our web site offerings to the tastes of
our users.
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a web site. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available web browsers allow users to elect to
remove these mechanisms at any time or to prevent such information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could have a material and adverse effect on our
business, results of operations and financial condition due to increased costs
of doing business. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The law
governing the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth and
development of e-commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. We also may be subject
to future regulation not specifically related to the Internet, including laws
affecting direct marketers.
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WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS
ACTIVITIES
On July 9, 1999, we were named as one of several defendants in a lawsuit
filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit
arises out of a series of events relating to certain assets our operating
company, Nettaxi Online Communities, purchased from SSN Properties in October
1997. The complaint alleges that we owed, and either intentionally or
negligently breached, fiduciary duties to the plaintiffs. The suit also claims
that we either intentionally or negligently interfered with the plaintiffs'
contract or prospective advantage. While our officers and directors believe
that the suit is without merit, we cannot provide you with any assurances that
we will prevail in this dispute. If the plaintiffs successfully prosecute any
of their claims against us, the resulting monetary damages and reduction in our
working capital could significantly harm our business. For more information
please see the section of our Annual Report on Form 10-K for the year ended
December 31, 1999 called "Legal Proceedings".
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. In addition, our
articles of incorporation provide that our board of directors may issue
preferred stock in one or more series. Our board of directors can fix the
price, rights, preferences, privileges and restrictions of the preferred stock
without any further vote or action by our stockholders. If our board of
directors issues preferred stock, potential acquirers may not make acquisition
bids for us, our stock price may fall and the voting rights of existing
stockholders may diminish as a result.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected valuations substantially above historical levels. During the
same period, these companies' stocks have also been highly volatile and have
recorded lows well below historical highs. We cannot assure you that our stock
will trade at the same levels of other Internet stocks or that Internet stocks
in general will sustain their current market prices.
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Factors that could cause such volatility may include, among other things actual
or anticipated fluctuations in our quarterly operating results, announcements
of technological innovations, conditions or trends in the Internet industry,
and changes in the market valuations of other Internet companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We could be exposed to market risk related to any and all of our debt
obligations for financing working capital and capital equipment requirements in
the future. Historically we have financed such requirements from the issuance
of both preferred and common stock. In addition, we have augmented our equity
financing activities via the issuance of convertible debt financing. We
continue to consider financing alternatives, which may include the incurrence of
long-term indebtedness. Actual capital requirements may vary based upon the
timing and success of the expansion of our operations. We believe that based on
the terms and maturities of any future debt obligations that the market risk
would be minimal. We currently do not have any material market rate risks.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Please refer to our previous disclosures in our Annual Report on Form 10-K
for the year ended December 31, 1999 and on our Form 8-K filed on May 8, 2000
for a description of certain matters.
From time to time, we are involved in legal proceedings incidental to our
business. We believe that these pending actions, individually and in the
aggregate, will not have a material adverse effect on our financial condition,
and that adequate provision has been made for the resolution of such actions and
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(1) From January to April, 2000 the Company under its 1999 Stock
Option Plan issued options to purchase up to 3,257,200 shares of common
stock to members of its board of directors who were not employees of the
Company, 3 officers, and 33 employees and 7 consultant with exercise prices
ranging from $2.44 per share, which was not less than the fair market value of
the shares on the date of grant. The issuances were made in reliance on
Section 4(2) of the Securities Act of and was made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investments,
and who represented to the Company that the shares were being acquired for
investment.
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(2) In March and April, 2000 we issued 778,982 shares of common stock
and warrants to purchase up to 389,491 shares of common stock to consultants in
exchange for the conversion of approximately $1.6 million in debt owed to the
consultants. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Please refer to our current Report on Form 8-K filed on May 8, 2000 for a
description of certain matters related to convertible debentures held by RGC
International Investors, LDC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 14, 2000, we solicited the consent of our stockholders to an
increase in the number of authorized shares of common stock to 200,000,000. We
received consents from holders of a majority of the then-outstanding shares of
common stock and the amendment to our Articles of Incorporation became effective
on May 8, 2000. The number of votes cast for the amendment was 21,620,209. The
number of votes cast against the amendment was 518,885. The number of shares
abstaining from voting was 26,675.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description of Exhibit
--------------- ------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
We filed current Reports on Form 8-K on April 20, 2000 and May 8, 2000
which included descriptions of certain matters related to convertible debentures
held by RGC International Investors, LDC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETTAXI.COM
Date: August 14, 2000 By: /S/ Dean Rositano
-- ----------------------------------------------
Dean Rositano,
President and Interim Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description of Exhibit
--------------- ------------------------
27.1 Financial Data Schedule
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